Mainland investors snubbed proposed market-boosting measures by the government and drove the Shanghai index down 5.23 per cent yesterday, when trading resumed after a week-long suspension for the National Day holiday.

The sharp drop represented another setback for Beijing, which had hoped its new incentives of margin lending and short selling would protect the market from the global equity rout in the past week.

The Shanghai Composite Index dropped 120.046 points to close at 2,173.738, its largest single-day fall in seven weeks.

Across the region, markets were engulfed by bearish sentiment. The Hang Seng Index sank 4.97 per cent while Japan's Nikkei-225 Index dropped 4.25 per cent.

'The hefty decline in the overseas markets in the past week has had a huge impact on A shares,' said Shenyin Wanguo Securities analyst Wei Daoke.

'To a certain extent, the shaky global market should be blamed for the return of Black Monday.'

In August, mainland stocks suffered three consecutive Black Mondays as the China Securities Regulatory Commission refrained from intervening at the time of the Beijing Olympic Games.

The regulator apparently was called into action by the overseas market fallout last week and announced on Sunday that it would soon launch the long-expected margin lending and short-selling practices to help avoid a sharp decline on the mainland exchanges.

The Dow Jones Industrial Average posted a 7.34 per cent weekly decline, its biggest since July 2002, amid the deteriorating credit crisis.

In another move to give a confidence boost, the People's Bank of China yesterday allowed companies to resume the sale of medium-term notes after a six-month hiatus, encouraging listed firms to buy back shares.

The central bank suspended sales of the debt early this year amid a selling spree.

'The resumption of the notes showed the government's desperation to ease companies' access to money amid the slowing economy,' said an official with a Shanghai bank's investment department. 'But whether this move will help buoy the ailing stock market is questionable.'

Beijing streamlined buy-back procedures for companies last month as part of efforts to rescue the slumbering market.

The market got a boost after September 19 when the authorities scrapped the stamp duty on stock purchases and encouraged state-owned behemoths such as Central Huijin to increase their A-share holdings.

Between September 19 and 26, the last trading day before the holiday break, the Shanghai index jumped 10.54 per cent.

'The gauge is likely to fall back to the level before the rebound,' said Zhang Xiuqi, an analyst at Guotai Junan Securities.

'After all, the margin trading and short-selling practices are of little use to stimulate stock purchases for now.'

The CSRC said it would start a trial run for the new tools, selecting a few brokerages to initially launch the businesses.

A source with one of the country's biggest brokerages said the market-boosting tools might not materialise until next month as the regulator and securities firms were putting final touches to the preparatory work.

Analysts expect a low level of interest among investors because they are wary of the poor market outlook.

Frank Gong, JP Morgan's chief China economist, has predicted that China may face deflationary pressure next year and the problem will turn out to be more severe than the stubborn inflation of the past two years.